Micron Technology (Nasdaq: MU) Over the past five years, the stock has blazed the market, posting a staggering 258% gain. Nasdaq 100 Technology Sector The index's return increased by a massive 136%.
A significant portion of the stock's gains have come since early 2023, when artificial intelligence (AI) hype began to build. Now, AI is more than just hype for chipmakers like Micron, whose products are helping build the infrastructure needed for widespread adoption of the technology. The good news is that AI is likely to remain Micron's biggest growth driver over the long term, helping to drive solid sales and profit growth for the company.
Let's consider why this is the case and see if Micron can continue to generate strong profits over the next five years.
Micron Technology plans to pump more capital into meeting demand for AI chips
When Micron Technology reported its second-quarter fiscal 2024 financial results in March, the company said its revenue rose 58% year over year to $5.8 billion. But it could have seen even greater growth if it had been able to meet all the demand for memory chips, known as high-bandwidth memory (HBM), that are being deployed in AI servers.
During a March earnings call, Micron executives said they “expect to generate hundreds of millions of dollars in HBM revenue in fiscal 2024.” The company also said that all of its 2024 HBM capacity is sold out, and that the “overwhelming majority” of its 2025 supply has already been allocated.
So it wasn't a surprise when Micron management recently raised its capital expenditures budget for 2024 to $8 billion from a previous estimate of $7.5 billion. The company will likely use the increased budget to fund increased HBM production, given that it expects this type of memory chip to be a multi-billion dollar business in the next fiscal year that begins in September.
As such, Micron expects revenue from HBM chip sales to accelerate significantly from fiscal 2024 to fiscal 2025. More importantly, the company's HBM business appears built for healthy long-term growth, as AI-oriented chips are expected to account for 61% of the total memory market in 2028, compared to just 5% this year, according to Micron peer SK Hynix.
Market research firm Yole Group predicts that the HBM market could generate $14 billion in annual revenue in 2024. The firm further projects that HBM shipments will grow at a 45% compound annual growth rate (CAGR) through 2029. Therefore, Micron is right to increase its capital expenditures, a move that should position it to capitalize on lucrative HBM opportunities in the long term.
But it's worth noting that Micron is looking to capitalize on the widespread adoption of AI in a variety of ways. While the business opportunity in servers is huge, investors shouldn't forget that AI-enabled smartphones and personal computers (PCs) will help chipmakers expand their market.
According to Global Market Estimates, the market for generative AI-enabled smartphones and PCs is expected to grow at a CAGR of nearly 35% by 2029. Moreover, AI-enabled smartphones and PCs are each expected to have more memory. According to Micron, AI PCs will reportedly have 40% to 80% more dynamic random access memory (DRAM) than traditional PCs. Meanwhile, the company expects “AI phones to have 50% to 100% more DRAM compared to current non-AI flagship phones.”
All of this points to why the memory market is projected to grow in annual revenue from $194 billion last year to $321 billion in 2030, according to Fairfield Market Research. This could pave the way for Micron to continue growing at a healthy pace for the next five years.
Accelerating growth could send the stock price even higher.
It's already clear that Micron delivered impressive revenue growth in the last quarter. This impressive sales growth is expected to translate into a strong increase in the company's profits.
For comparison, Micron ended its fiscal year with a loss of $4.45 per share due to a slump in the memory market caused by weak sales of smartphones and PCs. The company's annualized earnings growth rate for the past five years has been just over 10%, but as the chart above shows, the company's bottom line growth is expected to accelerate significantly.
Therefore, Micron's earnings are likely to grow at a faster pace over the next five years compared to the past five years. The market is likely to reward this acceleration with a rise in the stock price, making Micron's stock a smart buy now, as it is trading at an attractive level of 18 times forward earnings.
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Harsh Chauhan has no investment in any of the stocks mentioned. The Motley Fool has no investment in any of the stocks mentioned. The Motley Fool has a disclosure policy.
What will Micron Technology's stock price be in 5 years? was originally published by The Motley Fool.
